What's this blog about?
Well, not exclusively cleaning. The thought of reluctantly churning out dozens of “Top 20 tips to clean your…blah blah blah” type articles, purely because “we’ve got to do a blog” leaves me both cold, and, I suspect, with very few readers.
Instead, I thought I’d write about everything I’ve learned (and continue to learn) while running Cleanily, with the hope that this may actually be of use.
This section of the blog is therefore aimed at those with an interest in growing a service business, software, marketing and tech.
So why start a cleaning business?
A little over 4 years ago, I returned from a long stint overseas. In terms of career path, I was, shall we say, open to ideas. For many years my mother had run a hobby cleaning business, not really making any profit, though not making a loss.
There was no marketing, website or email address, invoices were posted, payment was made via cheque. It was becoming a burden to run, and she was intending to wind it up. Out of interest, I decided to investigate whether the business was capable of being scaled.
As I began researching the home cleaning market, I noticed a US company called Homejoy had just launched in the UK, with the intention of ‘disrupting’ the home services market.
Homejoy had raised around $38 million led by Google Ventures (as it was then known), which obviously spiked my interest.
Now, I barely had 38 quid never mind 38m, but Homejoy’s structure interested me, as did the amount of VC appetite at the time. However, I had no idea just how incredibly difficult such a seemingly simple business was going to be.
One of the reasons the likes of Google and Amazon were so interested in the home services market is that it’s estimated to be worth around $400 billion, and fragmented.
In addition, VAT and employment law also have a substantial amount to do with the fragmented state of the industry, and it’s why house cleaning services can be broadly divided into the following categories:
- Large national franchises like Molly Maid who provide a full cleaning service, with a fully employed workforce
- Large national franchises like Maid2Clean who are a booking agency for self-employed cleaners (who themselves supply the cleaning services)
- Marketplaces connecting customers and cleaners and booked online - also self employed cleaners
Let’s first of all identify the most obvious problems I saw: VAT (I’ll tackle employment status in the second part of this post).
You must currently register for VAT once you reach a turnover of £85,000. If you employ your cleaners directly, then you will be invoicing your customers and receiving payment into your account, from which you will be paying your cleaners.
You, The Company, will be regarded as providing the services, and will therefore need to charge VAT on top of whatever you charge your customers.
The reality of profit margins in house cleaning: charging on a p/hr basis:
If, prior to registration, you charged £13 per hour and hit £85,000 in revenue, this would equate to around 125 hours of regular cleaning per week, averaged over the course of a year (85,000 / 13 / 52 = 125ish hrs).
Enough work for around 6 - 8 cleaners (who typically need 16 hrs p/wk).
Let’s say then, that newly VAT registered MegaCleanaz, directly employs their cleaners and pays them £10 per hour (including NIC, holiday, admin etc) and makes 30% gross profit, using the above £13 p/hr example.
Not that attractive in a highly competitive local market is it? Especially when non-VAT registered ‘SupaCleanaz’ down the road can charge £13. If Mr & Mrs Bloggs had a 3 hour weekly clean, they could save £30 a month switching to SupaCleanaz.
The problem is that unlike the customers of commercial cleaning businesses (i.e. generally VAT registered entities) Mr & Mrs Bloggs at 55 Pigeon Street can’t reclaim VAT, and must therefore swallow this increase.
Now, assuming MegaCleanaz’s overnight price hike doesn’t lose them a substantial number of customers, let’s look at how the monthly revenue breaks down for those running the business.
Being generous, let’s assume MegaCleanaz, hangs on to their 125 hours of cleaning per week, and, against the odds, actually increases their customer base.
Let’s say they average 150 hrs p/wk in their first year of being VAT registered. On average this might give them around £10k per month revenue. Keeping things absurdly simple…their payments to cleaners would be approximately £6.5k (150 x £10 x 52 / 12) and let’s assume all other costs amount to £1000 total (including advertising).
That’s roughly £2,500 a month before tax.
That’s a shit load of hassle, work and stress for a possible (but unlikely) take home of around £2k, depending on your tax band.
That’s a problem.
It gets worse when you consider that in reality, you would most likely absorb some of the VAT yourself to remain competitive. This would then mean you’d have to grow your customer base to account for the loss in margin, with almost no advertising budget, and at a far less competitive price point.
So, what’s the solution?
Stay under the VAT threshold and don’t scale?
For many, yes, exactly that. This is why there are thousands of small/micro entities throughout the UK, serving a very specific local area.
An interim solution could be to apply for the flat rate scheme at 12% to lessen the impact so long as you stay under £230k turnover. However, if you have aspirations beyond this then you’re still faced with the same problem.
‘Per visit’ pricing
The solution, as adopted by large national franchises, is to charge a whopping hourly rate, disguised within a lump sum ‘per visit’ cost, priced via a ‘quote’. A team of cleaners (which often changes each visit) then turn up to perform the clean.
Sound like a good solution?
Well, commercially speaking, yes, it is. It’s basically how franchise operations, who directly employ their staff operate. The capital cost of the initial franchise, franchise fees, a small amount of stock and staff costs, mean that their actual hourly rates are extremely high in comparison to hourly rate models.
There are a number of reasons I decided not to use this pricing structure, but the main one is that it doesn’t really seem to be in the customer’s best interests. In my opinion, it’s actually a little deceptive.
Hardly a crime, sure, but conducting a home visit to provide a quote is absolutely NOT done for the reasons given. Companies that price in this way, justify a quotation as a means of pricing by insisting that:
“we tailor the service and price to individual needs, following a free, no obligation in-home estimate.”
In the early days of Cleanily, I trialled home visits too, and spent many hours walking around customers’ homes, making notes as they described what they wanted. Staggeringly, it turned out they all wanted the same things cleaned. It was a complete waste of time for both parties.
There was nothing (in terms of understanding the scope of the job) that could not be gleaned from a few minutes on the phone, or by making minor adjustments to the initial amount of time estimated, once the cleaner had performed the first clean (though this very rarely happens - people tend to have a good idea of how long it takes to clean their home, or have previously had a cleaner).
Obviously from a sales perspective, there’s more going on, but I’ll come on to that too.
Furthermore, if you think about it, the people actually performing the clean are still turning up to a new job unseen, relying only upon what has been relayed to them second hand. If it was an experienced cleaner performing the visit, meeting the customer and estimating the amount of time required, then yes, that would make more sense (which is actually what our cleaners sometimes do when customers wish to meet them beforehand).
Going back to the reason stated for providing an in-home quotation…due to “individual needs”. How might a customer’s individual needs impact upon the price?
Since the only service really being provided is the provision of labour, i.e. the cleaner’s time, it is clearly the case that the larger the volume of work/number of tasks, the longer the job will take.
Because cleaners are being paid by the company on an hourly rate, then quite obviously, you need to calculate the total time the job is likely to take in order to price in your margin.
So, in terms of pricing, an in-home quote is simply an estimate of the amount of time required.
In other words the company providing the quote knows EXACTLY how long the job will take, and could therefore easily provide an hourly rate once this is established.
Also, if this is really all they are trying to work out, couldn’t this be ascertained during a 5 minute phone call?
Yes, it could, because we’ve been doing it everyday for years. They don’t, because the rate would probably be over £20 per hour (in my experience).
But to be fair, it makes good commercial sense, so why didn't Cleanily adopt this model?
A few reasons. To me pricing like this seems slightly underhand and a little bit 1990.
Don’t get me wrong, I’m certainly not saying that tech is an instant answer to the intricacies of finding and trusting another human to access your property and clean it.
And there are definitely benefits to this model too. The franchisee can exercise a lot of control over their staff, in a way that an agency providing self-employed cleaners for example, could not. I also think that reliability and the standard of cleaning is generally speaking pretty good, due to the aforementioned control.
The thing is, it’s just way more cost effective for a customer to pay for cleaning services on an hourly rate. Simple as that. And for me that’s pretty much the only logic you need to apply.
However, I needed it to make commercial sense, and if I wasn’t going to franchise, I also needed to work out how I would deal with managing everything remotely.
So, having decided I was going to charge by the hour, and knowing I would hit an issue when I needed to register for VAT, I began to look at the agency model and employment status.